For several years now the Greek Government has philosophically contemplated conceding its regional airports to the private sector, even of floating its share of Athens Airport via an IPO, but has been restrained by its indebtedness.

Just as Greece desperately needs help to reduce its massive deficit, its airports lack investor appeal for the same reasons, i.e. the negative effect on both in and outbound travel brought about by the sovereign debt crisis, ultra high unemployment, the possibility that the country may leave the European Monetary Union and even the breakdown of civil order.

Nevertheless it appears the government is finally to make an attempt at privatisation, by leasing 21 regional airports and with the tendering process starting immediately.

Putting Greece’s overwhelming economic issues into perspective in a few words is not easy. Essentially, Greece’s enormous public sector (accounting for 40% of GDP) and over-borrowing allied to excessive EU aid (over 3% of GDP) for infrastructure projects such as the 2004 Athens Olympic Games and unwarranted availability of credit, led it into a downward spiral of debt similar to, but even worse than, that experienced by Ireland, Portugal and Spain (and now Cyprus) after the economy went into recession in 2009 as a result of the world financial crisis, tightening credit conditions, and the government’s failure to address a growing budget deficit.

The economy contracted by 2.3% in 2009, 3.5% in 2010, 6.9% in 2011, and 6.0% in 2012. In 2009 the deficit reached 15% of GDP. Major credit rating agencies downgraded Greece's international debt rating in late 2009 as a result of deteriorating public finances and consistent under-performance on reforms, leading the country into a financial crisis. The government did adopt a medium-term austerity programme but it faces long-term and often seemingly intractable challenges to push through unpopular reforms in the face of widespread unrest from the country's powerful labour unions and large parts of the general public.

In return for the largest bailout ever assembled, the government announced combined spending cuts and tax increases totalling USD40 billion over three years, on top of the tough austerity measures already in place but the country has struggled consistently to meet targets set by the EU and the International Monetary Fund (IMF). Those bodies agreed in Oct-2011 to provide a second bailout package of USD169 billion, requiring Greece's creditors to write down a significant portion of their Greek Government bond holdings. In exchange for the second loan Greece promised to introduce even more austerity measures during 2013-15. However, these seemingly inexhaustible austerity cuts are lengthening Greece's economic recession and depressing tax revenues so creditors are calling on the government to step up efforts to increase tax collection, privatise public enterprises, and rein in health spending, and are planning to give Greece more time to shore up its economy and finances. Many investors doubt that Greece can sustain fiscal efforts in the face of a bleak economic outlook, public discontent, and political instability.

Greece looks to Portugal airport sales for moral support

It is against this background that the decision to privatise these regional Greek airports was taken. The government will look to similarly indebted countries like Portugal and Spain for moral support and will find a little. Portugal managed to dispose of ANA Aeroportos de Portugal, which had some decidedly less attractive regional airports in its portfolio, along with those at Lisbon and Oporto. It was also able to co-opt the successful bidder – Vinci – not only into paying a healthy price (over EUR3 billion) but also to take on the responsibility of integrating island airports in the Azores back into the fold, paying off a large (EUR700 million) debt and even to commit to the building of a replacement airport for Lisbon, something that had looked increasingly less likely ever to happen.

The news from Spain is not so good, with the airport privatisation procedure still stalled there, amidst indecision and inertia, since Nov-2011. In Ireland, Shannon Airport has been commercialised and separated off from the Dublin Airport Authority but that looks to be as far as ‘privatising’ Ireland’s three main airports is going for the time being.

So, Portugal apart, Greece is the only other one of the seriously indebted euro zone countries to be brave enough to attempt to privatise its airports in this depressing economic climate in Europe, one that sees the majority of airports reporting negative traffic figures for Jan- and Feb-2013, making it an even worse time perhaps to try to catch the attention of the private sector.

Concession format for 21 airports offers no ownership but lots of ‘options’

The modus operandi for the concessions is as follows. Some 21 regional airports will be split into two groups to be conceded to private investors for a period of 30-35 years, according to plans presented by the Development Minister Costis Hatzidakis, and state privatisation fund (TAIPED) CEO, Yiannis Emiris.

No details on how much the project is expected to raise in state revenues were provided but estimates have been made externally (see below). The plans generally cover airports on mainland Greece, the Ionian islands and Crete to comprise one group, and others on the Aegean islands to make up the other; 37 in all including ‘options’.

Group 1 will consist of Thessaloniki, Corfu, Zakynthos, Cephalonia, Aktio, Kavala and Hania airports, with an option for the investor to add Alexandroupoli, Araxos and Kalamata airports. Group 2 will include Rhodes, Kos, Mykonos, Santorini, Skiathos, Mytilene and Samos, with the additional option of Chios, Limnos and Karpathos. Nea Anchialos Airport may be added to either of the groups. Mr Emiris stated that it is only the operation and development of the airports that will be conceded, while the state will retain ownership and monitoring rights through the Civil Aviation Authority. (The same applies to roads etc though state-owned corporations and public property assets will be sold off in full.)

Tenders will start immediately and concession contracts will last 30 to 35 years, with an extension option. Investors will be able to utilise the area around the airports by creating ‘commercial parks.’

In the case of Rhodes Airport, which is clearly seen as the Jewel in this set of Crowns, the lease will be restricted to 50 years, with the successful bidder asked to pay a sum up front for operation rights, plus a percentage of future profits to the state. The overall investment requirement is daunting. According to TAIPED, around EUR240 million will be needed to bring it, and the other airports, up to standard.

The problem with any attempt to assess the acquisition and enterprise values of these airports is that Greece has the greatest number of ex-mainland airports of any European country. Of 35 national and international airports, only 13 are on the mainland. The largest of these is Thessaloniki with 4.17 million passengers in 2012, just ahead of Rhodes which lies to the south of Turkey (3.81 million) but some way behind Heraklion (5.07 million) on the island of Crete (see map).

Greece's regional airports are widely scattered through the islands

Source: World Fact Book

Athens Airport accounts for one third of all passenger journeys

The dominant airport in Greece is Athens, which is not included in this transaction, being owned by the state (55%) in conjunction with Hochtief Airport, its fund HTAC (jointly 40%) and an independent Greek investor. Even though Athens has been in decline, losing around 22% of its passengers since 2008 (16.5 million down to 12.9 million in 2012), it still accounts for almost a third of all passenger journeys in Greece.

Two of the larger island airports have already been mentioned. Others are much smaller. For example Ioannina handled just 71,151 passengers in 2012 and Limnos 84,964. Many of the islands, whether they have airports or not, are dedicated to exclusive and relatively expensive cottage style vacations with no opportunity (or even desire) for mass tourism and have been adversely affected by the economic impact of the debt crisis. In the first week of Mar-2013 the Emir of Qatar “snapped up” six small Greek islands known collectively as the Echinades for a bargain price, having convinced the government to sell the idyllic isles as a job lot as the crisis-hit nationals struggled with the high real estate taxes imposed on them by the state.

Tourists have been staying away from the islands even though well-publicised civil unrest is mainly demonstrated in Athens and Thessaloniki and despite the fact that some of them, such as Santorini, rate amongst the most desirable places to vacation in the world. Even there, passenger numbers fell by an average of over 3% in the period Jan to Sep-2012 (latest figures available) while the average percentage decline at Kavala during the same period was 22%. Another factor is the lingering and media-hyped fear of the so-called ‘GRExit’ from the euro that could leave visitors with worthless pieces of paper in lieu of money.

Zakynthos is another island that makes for depressing reading where tourism is concerned. It is notably one of the islands that try to cater to a wide range of tastes, with small fishing villages and traditional hamlets dotted across lush mountains that are ‘complemented’ by burger bars and pubs down at the waterfront providing support to a much more hedonistic lifestyle.

But during the main season in the summer of 2012 tourism numbers declined by a fifth overall with the British absent by 20%, the Germans 40% and the Irish by half the previous year’s figure. Those statistics are confirmed by the consistent traffic losses at Zakynthos Airport during the year.

The potential for development of these island airports is also limited by the fact that Greece is not a physically large country and travel to, from and between islands by ferry is a well established alternative to air journeys. Meanwhile, the airports themselves are often dominated by Greece’s two main airlines, Olympic and Aegean, ferrying in passengers from Athens.

These two carriers are responsible for all the scheduled traffic at Santorini for example, with all arrival and departure activity concentrated into just three hours (11:00 to 13:00 and 15:00 to 16:00). Zakynthos Airport has only two carriers also (Olympic and Sky Express) with a similarly concentrated distribution of movements, while Thessaloniki’s Makedonia Airport does at least have 15 carriers and operations from 06:00 to midnight, even if half the capacity is taken up by Aegean Airlines.

On the other hand, Ryanair is an operator of services to some of the islands, notably Chania (Crete, which is a base), Corfu, Kefalonia, Zakynthos, Kos, and Rhodes, in addition to Thessaloniki. Corfu, Kos and Rhodes have services connecting with up to 10 cities each in Europe while the other islands tend to feature only one or two services. easyJet is also established, again mainly at the principal islands including Mykonos, Kos, and Rhodes, as well as Zante and Kefalonia. Similarly with airBerlin, Germanwings, Jet2.com and other budget airlines.

When added to the charter operators who continue operations here (including Thomas Cook, Thomson and Tuifly, also charter flights by scheduled network airlines like SAS) the overall airport portfolio for the larger island airports whose vacation offer is more comprehensive, is good. The problem is that even in the case of islands like Kos, almost every flight other than those by Olympic and Aegean is only seasonal. In the case of the smaller island airports the flights are often both thin in number and seasonal.

The prospect for investors with many of the airports included in these packages is therefore of limited traffic potential in the short and medium terms; in fact potentially a further decline if the socio-economic climate in the country deteriorates further.

Greece's entire airport lease package may be valued at only EUR40 million

This is bound to reflect in the price. Initial reaction from some sources suggests that the entire package may be worth only EUR40 million because, apart from a small number of airports (understood to be Thessaloniki, Rhodes, Corfu, Heraklion and Xania), they collectively make a big loss. So there is debt to consider on top of the enforced cost of refurbishment and new infrastructure within a market that at best will remain static for the foreseeable future. The additional complication of the government offering bidders the option of ‘mix and match’ is not thought to be attractive to interested parties, who would prefer the profitable airports with a solid tourist base and reasonable prospects only, to be offered

This is, of course, the same situation faced by a plethora of government transport ministries across Europe and beyond. How to maximise income from a group airport sale or lease while ensuring that the insignificant ones in terms of traffic remain part of the package and the best price is obtained for them along with a commitment from the new operator(s) to at the very least maintain the existing standard of airline operations. More so when some services may even be operated on a Public Service Obligation basis to ensure access by islanders to mainland service providers like hospitals, schools and bank finance. Portugal appears to have succeeded in the Vinci transaction but other countries still grappling with the conundrum include Spain and Norway.

There is even a suggestion in circulation that the Greek Government is not serious about it all. On the face of it that is nonsense. As with Portugal the ‘Troika’ comprised of the EU, IMF and European Central Bank, has made it clear to the Greek Government what must be done to meet the terms of its now EUR240 billion bailout and that includes disposing of exactly this variety of non-critical asset. And in order to remain in the euro zone, Greece promised in 2011 to reduce the nation's debt to GDP ratio mainly by selling its state-owned assets.

The counter argument is that EUR40 million barely nibbles at the edge of EUR240 billion; but the counter argument to that position is that anything is preferable if it avoids even more austerity being heaped on a hapless Greek population now in the sixth year of recession. Unemployment is at a record 26%, youth unemployment is measured in strings of digits astronomers would be familiar with, and a further 27,000 civil servants are lined up for retrenchment.

The Greek Government does itself no favours. In Oct-2012 and while under massive pressure from the Troika, it was revealed that it had somehow ‘unblocked’ funds so that it could push on with its intention to build a Formula 1 Grand Prix racing circuit at an estimated cost of EUR94 million, of which the government would cover one third.

Potential airport investors might feel a little aggrieved that they were going some way towards funding that rather than to pay off Greece’s debt and save the euro, if they chose to see it that way. Unless, of course, they had Araxos Airport near Patras, which is the closest to the proposed site, and which is an ‘option’ airport, on their wish list.

The usual airport investors need not be in the mix this time around; Chinese investors may be active

So who are the potential investors in this rather convoluted scenario? Typically there are the usual suspects whenever any state airport(s) come to the market but in this case it is really only possible to go off those that have recently (i.e. within the last two or three years, while the debt crisis has been in motion) identified a degree of interest in Greek airports, and to add a few educated guesses into the mix.

In the second category one should not discount Ferrovial (reputedly willing to look at any possibility just now) and TGV (already in Macedonia) plus possibly any one or more of the US hedge funds that seem suddenly to have developed an appetite for airports globally, together with smaller players like the Hermes Airports Consortium (already in Larnaca and Paphos in Cyprus and with some Greek/Cypriot shareholders).

Also one-offs like Britain’s Churchill Airports, which works in conjunction with financiers such as Barclays Capital and 3i, acting as a consultant.

The Greek Government is known also to have high expectations of Chinese investors; more so than any other region around the world and Chinese private investors already began visiting Greece to seek opportunities for investment in hotels, olive orchards and wine villages in the first half of 2012. But they are known to be wary of bigger infrastructure and in any case Chinese investors targeting Greece thus far have attempted to buy these tourism and wine industry assets at bargain prices.

The only really serious private sector player in Greece already, as mentioned previously, is Hochtief at Athens, and which helped deliver and runs a nice airport at Spata. But Hochtief seems set to exit the business.

Athens is not included in these packages – and another peculiarity is that no mention has been made of a plan that was devised in 2006 (actually the very first proposal was in 1986) to build an entirely new USD1.3 billion airport by 2016 at Kastelli on Crete, under a BOT contract to replace Heraklion Airport.

This was always a long shot, even before the recession began, as it required new roads, water and sanitation projects, also the transfer of settlements, and seems to have quietly been shelved. But as Heraklion Airport is included in one of the packages this is something investors need to know for sure.

This degree of uncertainty may be a tad too much for some, at least the more experienced investors. But on the other hand there is a growing appetite for infrastructure among the hordes of cash washing around without a home. They might just see this as a counter-cyclical investment opportunity – even though Greece's economy still has some cycles to rotate through before it stabilises.

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